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Market Wrap Ups

Bottom Callers Anonymous (Market Wrap Up 05/17)

After moving sharply lower into the New York lunch hour today, the bulls managed to stabilize the market and close near the highs at 1136, up 0.11% on the $SPX.  Days like today are interesting from a sentiment standpoint, as many traders are eager to call a bottom.  In fact, the daily updated and annotated chart of the S&P shown below, shows a possible bullish hammer today (long green wick with small body on top).

Note that on February 5th of this year, that hammer did, indeed, mark the bottom of the correction.  However, bullish hammers (as per Japanese Candlestick charting, signifying a day where the bears control the action, before the bulls make a very strong comeback late in the day to recapture the initiative) need confirmation to the upside before you should act on them. As far as resistance and support levels tomorrow are concerned, look for 1142 and 1150 to be resistance, and 1124 and 1115 as support.

As much as I would love to declare today the bottom to our most recent market correction, I remain skeptical for several reasons. For starters, many charts remain broken.  Moreover, the daily price swings and volatility are not healthy, and are not consistent of a market that is on the cusp of a sustained move higher.  Finally, I am not seeing institutions providing an underlying bid to this shaky market, via heavy buying volume.

As noted in an earlier post today, when the S&P dipped below 1120 I decided to take profits in all of my short positions (via inverse ETFs) and move to 100% cash. If you describe yourself as a swing trader, trading in tandem with the primary trend of the market, then I believe you have to step aside here until the market decides where we go next.  For all intents and purposes, we are in no man’s land.

On the one hand, leading stocks like $NFLX and $CREE were up sharply today, but on the other hand, their day to day price swings have been massive.  Violent price swings are particularly concerning after the kind of parabolic moves up that both stocks have enjoyed the past eighteen months, as they signal indecision and a possible reversal.

In addition to those two names, several other leading stocks (over the previous eighteen months) are showing troubling charts: $GMCR, $WPRT and $WYNN.

From my vantage point, these stocks are damaged and need time to repair.  That process is likely to take weeks, not days. I will continue to be skeptical of any bounces that I see, until the charts of the leading stocks offer good setups–and I do not even see decent ones at this point.

Calling any type of bottom (or top) in the market can be a fatal blow to your portfolio, as you are essentially shunning the opinions of millions of the smartest, wealthiest people in the world engaged in rigorous price discovery.  They are often armed with vast resources and information.  To be sure, there are times when it is correct to be a contrarian.  However, for every Warren Buffett who successfully becomes greedy when others are fearful, there are thousands of retail investors who become broke when others get rich off of their hubris to declare an inflection point, before it comes to fruition.

UPDATE: I have changed my daily S&P chart. Originally, I had said the imminent 20/50 day moving average crossover would be bearish.  However, Mr. Woodshedder was kind enough to point out that the data he has suggests that it is actually more bullish than bearish, so long as we continue to close about the 200 day moving average.  You can see it all, just click here.

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Market Wrap Up 05/13

After trading in a tight range for most of the day, the $SPX sold off sharply into the bell to close down 1.22% at 1157. Despite making several attempts at recapturing the 50 day moving average, the market rejected that price level today.  However, there are several key support levels below where the bulls will likely try to take a stand. Because we remain in a choppy, uncertain, news driven environment, a large cash position remains preferable.  Aggressive traders can have some short exposure, while any longs should probably not be initiated for anything more than a daytrade at this point, given our position below the 20 and 50 day moving averages.

The key support levels are 1155 and 1150, while the key resistance area to watch is the 50 day m.a. at 1174.

The semis had a notably weak day today, as their sector ETF chart indicates.

I am looking for more short exposure on further weakness here, to compliment my existing short position in the financials.  The financials ETF chart, updated from yesterday, continues to look bearish.

Many traders are keying in on the Euro for a variety of reasons, namely as a gauge of either risk appetite or risk aversion. The ETF shows us that the currency is at a crucial level right now.

Finally, here are updated gold and silver charts. I still like both metals, as they appear to be taking a healthy short term rest.

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Putting on Some Shorts (Market Wrap Up 05/12)

The bulls managed another impressive recovery today, as the $SPX rose 1.37% to close at 1171.  We have now convincingly closed above the 1150 area, which has been a key zone since January.  We also closed pinned against the 50 day moving average, which sets up an interesting scenario going forward.  On the one hand, we have seen a fast and furious V shaped recovery from last week’s high volume selling event. On the other hand, we now find ourselves back to where we were the day before the flash crash.  Beyond that, we are directly below the choppy and ultimate toppy trading range where we spent the entire month of April.  As you can see in the daily updated chart below, you really have to question how much more upside the bulls have left in the coming days.

Moreover, the volume today was far from inspiring.  Thus, despite (or perhaps because of) the exuberant rally that we have seen this week, I initiated several bearish bets today.  I went long three inverse ETF’s, $SKF (double short financials), $SDS (double short S&P) and $TZA (triple short small caps).   I did not buy what I would consider to be full positions in any of them.  I am simply putting my money where my analysis is for now.  If my thesis proves correct, I will likely add more.  If I am proven wrong, I will sell all three within a matter of days.  I still hold a large cash position north of 55% of my portfolio.

One of the main reasons why I have chosen to bet against the financials is because of the unimpressive nature of their sector ETF chart, shown below.

Clearly, the time to initiate a short position here was not in the middle of last week.  However, now that the gap has been filled back up to the trend line, I see an edge as a swing trader here to the short side.

The small caps are also showing a weak daily chart.

Perhaps I am completely wrong and we will blast through what should be strong resistance.  Frankly, if that happens I will be a big boy and take my lumps. I think your job as a swing trader is to conduct rigorous analysis on a daily basis while looking for potential trades that have an edge, where you think you will profit over the long run by using that same analysis, regardless of short term results. Here, we have seen a heavy volume selloff followed by an immediate V shaped low volume bounce right back up to a heavy congestion zone that trapped many bulls before we broke down.

By all means, if you have been sitting in a lot of cash and do not want to go short here, allow me to be the sacrificial lamb. I believe that I have made the proper diagnosis and that I have an edge for this trade, and I am willing to accept the risk that accompanies it.

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Not Buying Whatever You’re Selling (Market Wrap Up 05/11)

“Never mistake activity for achievement.” -John Wooden

Many traders often do not need someone pressuring them to make trades when they have no edge.  They do not even need “the wolf of Wall Street” in their faces giving them the hard sell on a stock, because they are too busy pressuring themselves to just do something…anything.  With the current volatile, confused market full of broken charts, I find it difficult to see how a swing trader could be active in this environment. The indecisive action today should support my belief that the market is jumping around, scratching its head and figuring out what to do next.

Rather than shunning patience, a better approach would be to consider the capital you would have lost had you grown impatient. Sure, for daytraders there have been some good opportunities, but beyond scalping here and there, the market is still trying to decide where its next move is going to be.  I expect to see more clues in the coming days, but I would rather be an objective observer via an outsized cash position, than be beholden to the violent, seemingly incoherent swings we have seen over the past few weeks.

For those of you who are struggling with keeping yourself from trading out of boredom, I would like to refer you to two pieces that I wrote over the past few months here and here, that will hopefully be helpful.

I will post some charts later this evening, but I wanted this post to capture more of the big picture and to make sure that we are always seeing the forest for the trees.  I guarantee you there will be better swing trading setups in the future, but the real issue is whether you will have the ammunition to take advantage of the easy targets when they eventually present themselves, instead of having used it up in this current choppy market.

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Let’s Bounce! Market Wrap Up 05/10

Stocks moved sharply higher today, on the back of the news out of Europe yesterday.  With the $SPX rising 4.40% to finish at 1159, the market is clearly searching for a direction in light of the heavy selling we saw last week.  Despite the positive action across the board today, the daily chart of the S&P does not offer as bullish a view.

While it is a positive for the bulls that we closed above the key 1150-1152 level today,  that area needs to hold over the next few days.   As usual, when fighting for a reversal, follow through is key.  Beyond that 1150 zone, however, the bulls face tough overhead supply above 1160, including the 50 day moving average.  Basically, the concept of overhead supply dictates that many of the longs who bought above the 1160 level and held throughout this recent selloff are highly likely to lighten up if they are made whole, given all of the pain that they endured on the way down.  It is that shift in psychology, from buying the dips successfully since March 2009, to selling the rallies that has me concerned about initiating long swing positions at this point.

If you have not read many of my posts up until the past week or two, I would not blame you for thinking that I have been overly cautious for being heavily in cash.  In fact, I missed out almost entirely on the big move up today.  However, I would urge you to please take a look at my earlier postings here and here, when the market was healthier and I consistently offered many actionable setups.

I am primarily a swing trader, holding for at least a few days or weeks.  My philosophy is to be extremely selective yet also very aggressive when I believe I have an edge.  However, when my analysis shows that I do not have much of an edge, I have no problem backing off from the action until charts reset and offer better opportunities.

Two examples of stocks that were once excellent, high momentum long stocks are $GMCR and $CREE. Let me go on record as saying that I think both firms are fantastic in their respective sectors, and deserved to be in the spotlight for many quarters since March 2009.  However, the price action in both names as of late should be a blinking red light as far as initiating long swing trades in general.  These stocks were the leaders on the way up, and when they start to break down, you had better take notice.

Folks, believe me when I say that I trust the aggregate price discovery mechanism of the marketplace in the leading stocks over what any economist or lagging economic data tells me.  If you want to wear a pocket protector and have your 49th birthday party at Chuck E. Cheese, then by all means go make your investment decisions based on the Calculated Bulging Disk, The Big Liberal Picture, and Zero Friends blogs.

However, if you are serious about making money in the market, then you will focus solely on what the price action in the market is currently telling you.  Right now, we are seeing wild price swings and an elevated level of news driven volatility.  Those facts are not constructive to swing trading with an edge.  By all means, go ahead and trade if you are an expert day trader who is confident that you will not get chopped up.

With that said, there are two possible setups that I am considering in the coming days–$GLD and $SLV. Given the unique nature of the underlying metals to those two ETFs, I am not surprised to see their charts looking constructive.

Above all else, do not be afraid to move to a larger than usual cash position as long as we continue to see these wild price swings.  As exuberant as the bounces may seem, many charts are broken and need time to heal before we should consider making bold bets.  If anything, some excellent short selling opportunities may present themselves soon.

Thanks to everyone who voted yesterday as well as those of you who have read my work, and I am looking forward to us banking some coin together!

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